Annual 2016 Market Overview

Annual 2016 Market Overview

During 2016, the US stock market posted its best performance since 2013 after shaking off a horrific start of the year that concluded with the DJIA dropping to a two-year low of 15,660 on February 11th. The index of 30 Blue chip stocks would ultimately end the year plus 26% from that low watermark and closed the year with an annual gain of 13.42%.

Reversing course from the previous year the energy sector was the biggest gainer of the S&P 500 advancing 27.36 % during 2016 after experiencing 2 years of declines. Financial stocks
(+ 22.80%) also performed very well particularly in the latter part of the year benefiting from the prospect of less regulation coupled with a more aggressive plot of higher interest rates going forward after the Federal Reserve finally raised rates in December, for only the second time in the last 9 years.

The Russell 2000 was up 19.48% in 2016, far outpacing gains for the Dow and S&P 500, trading on the thesis that its components are more focused on the US economy, which at the moment, looks more promising than companies operating abroad.

Equity Markets 4th Quarter

The small cap Russell 2000 was the best performing equity asset class in the 4th Qtr. with a return of 8.43%. The DJIA was a close

second at 7.94%. The NASDAQ lagged with a return of just over 1.34% as the S&P Value Index clearly outperformed the S&P Growth Index by a notable 9.17% during 2016.

International Developed had a 2016 calendar year loss of (-1.88%) as well as (-1.04%) quarterly loss respectively. Facing the headwind of a stronger US $ Emerging markets continued to struggle losing (-4.56%) in the 4th quarter, but did advance 8.58% for
the year due to an early year rally.

The Bond and Credit Markets

The Federal Reserve raised rates by 25bpts at its final meeting of 2016, just as it did on the last meeting of the year in 2015. For the second year in a row, the US bond market declined with the 10 year Treasury closing the year with a 2.44% yield compared to 2.273% at the end of 2015. However, there was plenty of volatility in between as the 10 year hit a record low of 1.36% in July 2016 but would sharply rise to 2.6% by December 16th, before renewed caution signs pulled back yields by 16bpts during the last 9 trading days of the year.

The 30-year Treasury bond ended the year yielding 3.07% up from 2.97% from December 31, 2015.

As we surmised in January 2016 the high yield bond market did reverse declines of 2015 and consequently was the best performing bond sector returning 17% during the year. US investment grade bonds had a total return of 5.8% and Treasury Inflation protected securities returned 4.3%. Municipal Debt lagged with just a .25% full year return after experiencing an impactful (-3.61%) quarterly loss.

Oil Stabilization

Not coincidentally oil also bottomed on February 11th at $26.21 but would close the year over 100% higher at $53.72 per barrel buoyed no doubt by the election results and a late year agreement by The Oil Petroleum Exporting Countries agreement to cut production. For the calendar year, oil advanced just 2% but the price has now shown signs of stabilization. With the prospect of the incoming Secretary of State hailing from big oil, the political climate appears to be shifting toward policies that would benefit the industry.

Gold

Gold rallied sharply in 2016 prior to the election and ultimately advanced by 8.49% showing its first calendar year gain since 2012.

Real Estate

The S& P United States REIT index lost (-3.99%) during the 4th quarter but still ended the year with a 4.30% return.

As we mentioned in last year’s final commentary, Charles Schwab’s Liz Ann Sonders astutely noted that US stock market history reveals that whenever the S&P 500’s price only return ended the year flat as was the case in 2015, defined as a return between -2%-+2%, the following year the market’s return was positive by double digits. She was very close in her assessment as the S&P closed 2016 9.54% higher than it ended in 2015, and finished more than 20% higher than the February 2016 low.

With the uncertainty of Congress’ composition and Presidency election in the rearview mirror it appears that the US is embarking on a period of less regulation and lower taxes. The question that remains is whether new trade policies, coupled with the prospect of probable inflation and higher rates (and likely higher deficits) will push the US off course of a sustained economic recovery.

As always, we wish you and your family good health and fortune in 2017. We thank you for your confidence in our team’s abilities to navigate an ever-changing investing environment.